The stock market has rocketed to new highs over the last year, but some industries are faring better than others.
Weak consumer spending trends have sent shares of top retail and restaurant stocks well off their highs. Some are paying generous dividends to their shareholders. With their share prices down, investors can buy these stocks at attractive yields. Here are two stocks that would make solid income investments.
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1. Dollar General
Dollar General (NYSE: DG) stock has fallen to multiyear lows over weak sales trends and lower profit margins. Some analysts are blaming competition from Walmart for the company's problems, but Dollar General still has a solid competitive position that could lead to significant gains for shareholders.
Sales increased 5% year over year in the third quarter, with same-store sales up 1.3%. Management is remodeling stores and speeding up delivery in its supply chain, which could lead to even better growth over the next few years.
Dollar General is not growing as fast as other large competitors, but that doesn't mean it lacks a competitive advantage. The company has a wide store base of more than 20,500 stores across the U.S. and Mexico, putting a store in close proximity to a large segment of the population. It delivered positive same-store sales growth every year for the last few decades except for 2021.
It seems the biggest factor driving the stock lower is not weak top-line growth but lower margins. Earnings per share (EPS) fell 29% over the year-ago quarter, although year-to-date cash flow from operations jumped 52% as the company reduced its inventory.
Even Amazon has seen its sales growth weaken over the last few years. Dollar General seems to have fallen victim to a weak consumer spending environment, which could lead to significant upside once business conditions improve.
The current quarterly dividend is $0.59, bringing the forward yield to 3.22% at the recent $73.35 share price. This represents 40% of expected earnings for 2024, which allows plenty of wiggle room for management to continue paying dividends as it works through a challenging sales environment.
With the stock also trading at just 13 times forward earnings estimates, investors are looking at a genuine bargain for this leading retail business.
2. Restaurant Brands International
Investors may not recognize Restaurant Brands International (NYSE: QSR), but it's the owner of Burger King, Tim Hortons, Popeyes, and Firehouse Subs. Like Dollar General, the stock is underperforming because of weak sales and earnings.
Comparable sales grew 0.3% year over year in Q3, while adjusted earnings were up 4.6%, but each restaurant brand delivered mixed results. Excluding international results, Tim Hortons was the only brand that reported positive comparable-store sales last quarter.
The company still has a lot of growth opportunity, as international comp sales outperformed the company's home markets, up 1.8% year over year in Q3.
Across all brands, management is planning to grow its restaurant count to 40,000, up from more than 30,000 restaurants, by 2028. Importantly, this growth will not come at the expense of profits. The company is targeting average annual growth in adjusted operating income of at least 8%. Management also plans to repurchase shares when the stock is trading at an attractive valuation, which it is right now.
The 17 forward price-to-earnings (P/E) multiple is a bargain, considering it will likely earn a higher P/E closer to the S&P 500 average in a stronger sales environment. The average S&P 500 P/E is 30.
The stock's value is supported by its high yield. With the quarterly dividend at $0.58, the forward yield is 3.70% at the recent $62.60 share price. The company is paying out 70% of expected 2024 earnings, and analysts expect earnings to grow 12% in 2025 to $3.72.
Dollar General and Restaurant Brands International will likely see their financial results improve over the next several years, and that will also lift their P/E multiples. As these companies improve their sales and earnings, these stocks could deliver handsome gains and pay investors a nice dividend to boost their return.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. John Ballard has positions in Dollar General. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool recommends Restaurant Brands International. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
